NVIDIA's Ambitions for Arm In Peril After FTC Moves to Block Deal

The Federal Trade Commission’s lawsuit against NVIDIA has put the prospects of its $40 billion bid to buy Arm and assume a more central role in the semiconductor industry in jeopardy, industry analysts said.

The FTC said that it was suing to block the deal on the grounds that it would give NVIDIA unlawful control over Arm technology that hundreds of firms count on to develop chips. The agency alleged it would lead to higher prices, less choice, and reduced innovation, and hobble rivals in markets where NVIDIA competes with Arm-based chips, such as data processing units (DPUs) and Arm CPUs for cloud data centers.

The complaint is part of an escalating global regulatory battle that has also exposed tensions between NVIDIA and rivals such as Qualcomm that are opposed to the deal, which would upend the semiconductor industry. 

Industry analysts have warned for months that the deal would likely fall apart after backlash from NVIDIA rivals and Arm partners. But the FTC’s action makes it even more unlikely than it already was, they said.

Said Lil Read, technology analyst at research firm GlobalData: “The NVIDIA-Arm deal is on its last legs.”

“Stake in the Heart”

The Santa Clara, California-based company is not accepting defeat in the proposed deal and said it would work to prove to the FTC that it would boost competition, not hurt it, and promote innovation, not stifle it.

"As we move into this next step in the FTC process, we will continue to work to demonstrate that this transaction will benefit the industry and promote competition,” NVIDIA said in a statement last week.

Previously, NVIDIA CEO Jensen Huang has said he anticipated the deal to close by early 2022.

Sravan Kundojjala, a senior analyst at Strategy Analytics, said it would likely take much longer than that for the regulatory process to play out. He said NVIDIA faces a regulatory gauntlet in the UK and EU, adding months of delays that could derail the deal. There is also uncertainty in China, where officials also have the power to block the takeover, he said.

The FTC plans to present its case against the deal at a trial scheduled for August 2022, but it is unclear how long it could take to get a verdict for or against the deal. 

“I thought it was a long-shot deal before,” said Jack Gold, founder and principal analyst at J. Gold Associates. “But I think the FTC is the stake in the heart of the deal—because this could go on for years.”

Arm sells licenses a vast library of intellectual property that underpins the global smartphone ecosystem. Every major semiconductor firm in the world buys chip blueprints from Arm, including Apple and Samsung. For NVIDIA, the deal would transform it into one of the more formidable rivals to Intel, as companies continue to adapt Arm’s technology for data centers and personal computers such as Apple’s Macs.

Arm is often dubbed the “Switzerland” of the chip industry because it sells licenses to its blueprints to hundreds of customers while competing with none of them, selling to any company willing to pay a fee.

And so, Gold said, the prospect of a single company taking control of the instruction set architecture (ISA) at the heart of tens of billions of chips was bound to be unpopular with NVIDIA rivals and Arm partners.

The FTC argued, if the $40+ billion deal closes, NVIDIA would not only have the ability but also the incentive to undercut rivals instead of working with them to succeed because they compete for the same business.

The deal would also give it enormous power over who can use Arm’s semiconductor blueprints. NVIDIA has pledged to leave Arm alone in the future and to be unbiased when it comes to customers it competes with. 

“But companies change,” Gold told Electronic Design. “They change executives, they change boards, they change priorities. At that point how can you prevent it from happening? There are no guarantees."

Customer Fears

The FTC’s complaint echoes what other industry insiders have said during the last year about the potential pitfalls of giving NVIDIA control over Arm’s technology.

While US chip-making giants Broadcom and Marvell have come out in support of the deal, others oppose it. Qualcomm takes issue with the deal over concerns that NVIDIA would subvert Arm’s status as a neutral industry player, giving itself early access to future Arm technology. It is also unnerved by the possibility that NVIDIA could restrict access to Arm's processor blueprints to its rivals or raise prices.

Concerns over the loss of Arm’s independence have also rattled US technology giants, including Google and Microsoft, both of which are reportedly against the deal.

The US warned that NVIDIA would have access to proprietary information that other companies share with Arm in the process of developing chips. The complaint said that could make firms, including NVIDIA's rivals, hesitant to work closely with Arm to keep their product plans secret, resulting in what the FTC warned could be “a critical loss of trust in Arm and its ecosystem.”

The FTC said the semiconductor giant would also be able to use the information against its rivals, largely by focusing Arm’s research and development on innovations that are more valuable to NVIDIA, leaving its rivals at a disadvantage.

The legal challenge is not insurmountable for NVIDIA, which could agree to concessions to salvage the deal, experts said. But it is unclear what it would take for the FTC and other regulators to have a change of heart.

The regulatory battles in the US and other jurisdictions signal that Arm’s customers, Nvidia’s rivals, and government officials are not convinced NVIDIA would keep Arm independent over the long term, Gold said.

A Global Backlash

The US is the latest jurisdiction to take aim at the deal announced in late 2020. The European Commission, the executive arm of the European Union, launched a full investigation into the deal’s consequences in October.

Margrethe Vestager, head of the commission’s competition arm, said: "Our analysis shows the acquisition of Arm by Nvidia could lead to restricted or degraded access to Arm's IP, with distortive effects in many markets where semiconductors are used.”

The UK, where Arm is headquartered, is also examining the deal more closely. Last month, the UK ordered the Competition and Markets Authority (CMA) to conduct a six-month investigation of the merger over its concerns it could hamper competition in the chip sector. Arm is one of the UK’s most important intellectual property assets, and industry experts said it is very unlikely the country wants it to fall into American hands.

The proposed deal must also be approved by China, where regulators are apparently still assessing the pros and cons of a combination between Arm and one of its licensees. The final verdict is complicated by ongoing trade battles and political tensions between the US and China. Arm has also struggled to resolve a spat with Allen Wu, the former CEO of Arm China, which is throwing more instability into the process.

The FTC said it was cooperating with regulators in other regions, including in Japan and South Korea.

NVIDIA has been working to fend off regulators since announcing its bid to buy Arm. But attempting to get the green light from government officials around the world, often with different priorities, has been a challenge for the company.

“The FTC won’t let it be—nor will the UK CMA or the EU regulator,” Read said. “It’s likely that even if the deal managed to clear those hurdles, Chinese regulators would throw another wrench in the works. Tying the acquisition up for another two years is not in anyone’s interest now—not NVIDIA's, and certainly not Arm’s.”

With or Without Arm

NVIDIA, the largest US semiconductor vendor by market value at about $800 billion, has said the concerns are unfounded, and that it wants to preserve Arm’s neutral status now and into the future. NVIDIA said that Arm’s independence turned it into a juggernaut of the industry, and it would be detrimental to get rid of it. The firm plans to keep any information shared with Arm confidential so it cannot be used inappropriately.

If the takeover falls apart, SoftBank and Arm will get to keep a $1.25 billion breakup fee from NVIDIA.

NVIDIA has also promised to put more money into Arm’s research and development and expand Arm’s lineup to transform it into a more formidable player in markets dominated by Intel’s X86 architecture, including data centers and PCs.

But the deal falling apart would not hurt its fortunes as a standalone company, analysts said. NVIDIA has been buoyed by booming demand for graphics processors used in gaming and artificial intelligence chips it sells for the data center market. The FTC complaint noted that NVIDIA is already “one of the world’s largest and most valuable computing companies.”

The company can also likely pursue its ambitions in Arm-based CPUs for cloud data centers and other areas by licensing Arm’s technology like everyone else, experts said.

“We think Nvidia will be OK with or without Arm,” said Kundojjala.